Statement at the Conclusion of an IMF Mission to the Democratic Republic of São Tomé and Príncipe

Press Release No. 10/429
November 12, 2010

A team from the International Monetary Fund (IMF) visited São Tomé and Príncipe (STP) during October 29 - November 11, 2010 to continue discussions initiated in May on the 2010 Article IV Consultation1 and to conduct the second and third reviews of the economic program supported by the IMF under the Extended Credit Facility (ECF) arrangement2. The mission met Honorable Prime Minister Patrice Trovoada, and held discussions with Minister of Finance and International Cooperation Américo d’Oliveira dos Ramos, Minister of Planning and Development Agostinho dos Santos Fernandes, Central Bank of São Tomé and Príncipe (BCSTP) Governor Luis de Sousa, other senior officials of the government and the BCSTP, members of the Economic and Finance Committee of the National Assembly, and representatives of commercial banks, the business community, and São Tomé and Príncipe’s development partners.

At the conclusion of the visit, Mr. Tsidi Tsikata, Mission Chief for São Tomé and Príncipe, issued the following statement in São Tomé:

“The new government that took office after the elections in August 2010 discussed its vision for the country with the mission and indicated its endorsement of the objectives of São Tomé and Príncipe’s program supported under the ECF arrangement. The government underscored the importance of a stable macroeconomic environment for promoting growth and reducing poverty.

“Economic growth has picked up slightly in 2010 after a marked slowdown from 6 percent in 2008 to 4 percent in 2009. The slowdown was driven by a decline in foreign direct investment (FDI)—partly reflecting the impact of the global financial and economic crisis. Although FDI declined further in 2010, an increase in externally-financed public investment projects boosted economic activity. The annual rate of inflation has trended down from a peak of 37 percent in July 2008 to 13 percent in September 2010. The exchange rate peg introduced in January has functioned smoothly and should help lower inflation further.

“The government and the IMF team discussed measures to strengthen fiscal performance in order to safeguard international reserves and the exchange rate peg. Measures to lower the fiscal deficit in 2011 will build on recent efforts of the revenue departments to expand the register of taxpayers, enhance the enforcement of tax laws, and improve customs administration. On the expenditure side, the government will better prioritize spending—especially on goods and services and transfers—in order to keep total expenditure within available resources.

“The mission urged the government to address the recurring problem of arrears accumulation between the Treasury, the water and electricity corporation (EMAE) and the petroleum importing company (ENCO). This should be done by more realistic budgeting for government utility payments, tackling the structural problems underlying EMAE’s weak financial position (e.g., large losses in the generation and transmission of power, and a tariff structure that yields revenues that do not cover costs), and allowing retail prices of petroleum products to move in line with international prices.

“The mission welcomed recent measures taken by the central bank to improve the health of the banking system, including enforcing an increase in the minimum capital requirement and intervening in a troubled bank. In order to maintain the stability of the banking system, the mission urged the central bank to ensure that its capacity to supervise banks keeps pace with the expansion of the sector.

“Notwithstanding the substantial debt relief it has received from its bilateral and multilateral partners, STP remains at high risk of falling back into debt distress because of its limited export and production base. The IMF mission welcomed the government’s commitment to avoid commercial borrowing and instead rely on external grants and highly concessional loans to finance development programs.

“Most of the program targets for 2009 and the first half of 2010 were met, with the exception of the performance criteria on the domestic primary deficit. The mission and the authorities reached understandings, ad referendum, on measures to strengthen performance under the program. IMF Board consideration of the reviews could take place in January 2011.”

1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and a summary is transmitted to the country’s authorities.

2 The Extended Credit Facility (ECF) has replaced the Poverty Reduction and Growth Facility (PRGF) as the IMF’s main tool for medium-term financial support to low-income countries. It provides for a higher level of access to financing, more concessional terms, enhanced flexibility in program design, and more focused, streamlined conditionality. Financing under ECF currently carries a zero interest rate, with a grace period of 5 ½ years, and a final maturity of 10 years. The IMF reviews the level of interest rates for all concessional facilities every two years.